In Focus: Beef market update

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Economic Report In Focus: Beef market update Phin Ziebell, NAB Agribusiness Economist KEY ASIA INSIGHTS This monthly economic report is designed to provide our clients with an insight and overview on

1 Economic Report In Focus: Beef market update Phin Ziebell, NAB Agribusiness Economist KEY ASIA INSIGHTS This monthly economic report is designed to provide our clients with an insight and overview on a particular commodity or topical issue in the agribusiness sector, it covers commentary on each of the major agricultural commodities relevant to Australia. April 215 Cattle at Euroa, Victoria. Photo: Mai Thai

Key points Cattle prices began to ease in February and continued to fall until late March, before trending upward in early April in line with higher 9CL export prices to the US.

2 Key points Cattle prices began to ease in February and continued to fall until late March, before trending upward in early April in line with higher 9CL export prices to the US. Overall, the Eastern Young Cattle Indicator fell 4.6% (AUD) month on month to AUc/kg. The beef industry fundamentals for 215 remain strong. Demand for protein in Asia is likely to grow in the medium term, and the recently signed free trade agreements with Japan and China will improve Australia s competitive position, especially when combined with a falling AUD. We forecast the AUD to fall to 74 US cents by the end of 215 before bottoming out at 73 US cents in early 216. While prices remain much higher than the same time last year, A lack of rainfall remains the biggest challenge for the Australian beef industry. Drought remains an ongoing risk in Q2 and beyond. Contents Climate update 3 Production and price update 4 Trade: United States 5 Trade 6 Industry outlook 7 Regional perspectives: NAB Agribusiness 8 Price and domestic production forecasts Month on month price change (AUD) annual production change annual price change (AUD) 4.6.4% 22.6% Source: NAB Group Economics, Meat and Livestock Australia and ABARES. Forecasts represent year-on-year average changes. Production forecast as per ABARES. Photo: Mart Moppel Economic Report: Rural Commodities Wrap April 215 2

Climate update Figure 2: Australian rainfall percentages March 215 Rainfall across Australia was generally well below average in March, with the exception of Western Australia, Tasmania and parts of

The dryer conditions, especially in Queensland, precipitated a less optimistic mood than earlier in the year, when parts of Queensland enjoyed decent rainfall.

Parts of Outback South Australia and the South West Western Australia are forecast to have a more than 8% chance of receiving above average rainfall.

3 Climate update Figure 2: Australian rainfall percentages March 215 Rainfall across Australia was generally well below average in March, with the exception of Western Australia, Tasmania and parts of the Darling Downs and northern New South Wales. Parts of Western Australia, excluding the Pilbara and the state s easternmost areas, enjoyed above average rainfall. The dryer conditions, especially in Queensland, precipitated a less optimistic mood than earlier in the year, when parts of Queensland enjoyed decent rainfall. The Bureau of Meteorology s rainfall outlook for May to July 215 forecasts above average rainfall for almost all the continent, with the exception of Cape York, Arnhem Land and Tasmania. Parts of Outback South Australia and the South West Western Australia are forecast to have a more than 8% chance of receiving above average rainfall. While the latest forecast is welcome news, particularly for southern beef farmers, it may arrive too late for strong autumn pasture growth. The rainfall is likewise too late for northern producers, who saw a difficult finish to the wet season in many areas. Source: Bureau of Meteorology Figure 3: Australian rainfall outlook May to July 215 Source: Bureau of Meteorology Burdekin Falls Dam, Queensland. Photo: CSIRO Economic Report: Rural Commodities Wrap April 215 3

4 Production and price update After peaking in late 211, cattle prices declined for much of 212 and 213 as the drought took hold in Queensland. 214 saw moderately higher saleyard prices as exports surged, but price growth was kept in check by elevated slaughter rates in part caused by drought induced destocking in Queensland. The benchmark Eastern Young Cattle Indicator gained 5.9% in 214. With good rain in parts of Queensland in December 214 and January 215, prices shot up in the new year, breaking 45 AUc/kg in February. However, as rainfall dissipated across major Queensland beef regions by February and March, prices fell back below 42 AUc/kg in late March. From early April however, prices have partly recovered in line with a recovery in US 9CL beef export prices driven by a lower AUD. While prices remain much higher than the same time last year, poor conditions in some Queensland beef regions continues to temper restocker enthusiasm. Drought remains an ongoing risk in Q2 215 and beyond. Slaughter rates remain elevated in 215. Q1 215 eastern states slaughter (including calves) was up 1.1% on the already elevated Q1 214 slaughter rate. These elevated rates partly reflect strong processor demand for export, but also a lack of rainfall precluding herd rebuilding. Eastern Young Cattle Indicator (AUc/kg) Weekly eastern states cattle and calf slaughter QLD NSW SA VIC TAS 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Value of monthly beef exports by state of origin (AUD million) (ex. live cattle) Northern Territory Western Australia Queensland New South Wales Source: Australian Bureau of Statistics Tasmania South Australia Victoria Economic Report: Rural Commodities Wrap April 215 4

5 Trade update: United States Australia is the United States 214 was a record year for Australian beef exports to the United States. The US has increasingly looked to imports in the 9CL hamburger beef market on account of drought conditions depleting the US cattle herd. With Australian slaughter elevated for 214 and into 215 (owing in part to drought induced destocking), Australian producers have been able to meet this demand. Meanwhile, export prices jumped significantly from mid-214. Late 214 and early 215 brought a dip in the quantity exported although this has since rebounded. The March 215 export volume stood at 42,28 tonnes, not far shy of the recent peak of 47,238 tonnes in September 214. Australian beef exports to the US have not reached these levels since the early 2s. The 9CL export price stood at AUc/kg on 26 March 215, 32.2% higher than the same time in 214. While the sharp jump in price from June to September 214 largely reflected a USD price jump, USD prices have since fallen and the continued elevated levels in AUD terms largely reflect AUD depreciation. Australian 9CL beef export price to the US AUc/kg US economic conditions USc/kg Growth in the U.S. economy appears to have slowed at the start of 215, similar to last year (when it actually went backwards in the first quarter). Like last year the winter has been unusually harsh but other factors are clearly also in play this time around, including US dollar strength and sectoral impacts from the oil price declines. Like last year, we expect the weakness to be short-lived, and for the economy to resume growing at an above trend pace. Tony Kelly Senior Economist, United States Monthly Australian beef exports to the US (tonnes) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Monthly Australian beef exports to the US (tonnes) 6, 5, 4, 3, 2, 1, Other Costa Rica Brazil Uruguay Nicaragua Mexico New Zealand Canada Australia Economic Report: Rural Commodities Wrap April 215 5

6 Trade update: Asia Australian beef exports to East Asia did not grow significantly in 214, although volumes are mostly up in 215. Exports to Japan were up 24.1%, to Korea up 14.7% and to China down 6.7% in March 215 compared to the same time in 214. In addition, recently signed Free Trade Agreements with Japan and China may spur demand for Australian beef in the coming years. The Japan-Australia Economic Partnership Agreement will see Japanese tariffs on Australian frozen beef fall from 38.5% to 3.5% this year and ultimately to 19.5% over 18 years. Tariffs on chilled beef will fall from 38.5% to 32.5% this year and ultimately to 23.5% over 15 years. The China-Australia Free Trade Agreement will see Chinese tariffs on Australian beef fall from 12-25% to zero over nine years, although a discretionary safeguard (i.e. where trade barriers may be imposed) remains above 17, tonnes. Australia exported just under 125, tonnes of beef to China in 214. Australian chilled grass fed fullset export price to Japan (AUc/kg) Chinese economic conditions China s latest national accounts data showed that the economy expanded by 7.% in the first quarter of 215, down from 7.3% in Q4 214 and the weakest rate of growth since March 29. Our forecasts are unchanged with China s economy to grow by 7.1% in 215 and 6.9% in 216. Chinese authorities have expended considerable political capital in describing the slowing trend as the new normal and are unlikely to tolerate growth falling below their target for a second straight year. Gerard Burg Senior Economist, China Monthly Australian beef exports to the Japan, South Korea and China (tonnes) 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Japan South Korea China Per capita beef and veal supply China (kg per capita per year) Source: UN FAOSTAT Economic Report: Rural Commodities Wrap April 215 6

7 Industry Outlook The beef industry fundamentals for 215 remain strong. Demand for protein in Asia is likely to grow in the medium term, and the recently signed free trade agreements with Japan and China will improve Australia s competitive position, especially when combined with a falling AUD. We forecast the AUD to fall to 74 US cents by the end of 215 before bottoming out at 73 US cents in early 216. US demand for 9cl hamburger beef is likely to continue while US herds rebuild following a severe drought. However, with more favourable weather returning to parts of the United States and international grain prices pushed lower, Australian beef exports to the United States may slow in the coming years if additional US domestic beef supply becomes available. A lack of rainfall remains the biggest challenge for the Australian beef industry. After an encouraging start in many areas, the wet season saw a generally disappointing finish and parts of Queensland, especially in the west, remain mired in drought. Even southern areas, which have generally fared better, are seeing a shortage of pasture and may lose the autumn break if rain does not come soon. While the latest forecast for above average rain coming into winter is welcome news, particularly in the south, it may arrive too late for strong autumn pasture growth. The rainfall is likewise too late for northern producers. Our central case forecast is for the EYCI to rise 22.6% year on year from to and for production to increase.4% over the same period. Economic Report: Rural Commodities Wrap April 215 7

Regional perspectives: NAB Agribusiness bankers Conditions in North Queensland Cattle prices are strong and global demand is really driving the industry, especially with such strong exports to the US.

8 Regional perspectives: NAB Agribusiness bankers Conditions in North Queensland Cattle prices are strong and global demand is really driving the industry, especially with such strong exports to the US. The lower AUD is having a real impact and there is even talk of sending live breeder cattle to the US. Fundamentals in the industry are strong, but heading into the fourth year of drought is really hurting many producers and communities. The wet season didn t arrive, and what rainfall was received was patchy. Some have been lucky, although most haven t and the wet is basically now over. Producers are now taking action, moving stock, agisting, selling stock, and in some cases purchasing well grassed properties. The focus is now on maintaining herds and keeping breeding stock alive until the wet season returns in late 215. Geoff Howard Regional Agribusiness Manager Conditions in New England The store market has been strong recently and prices to feedlots and processors have also been strong. Cattle per square kilometre Source: Australian Bureau of Statistics and NAB Group Economics Restocking is also on the agenda with numbers down after last year. Whilst the rain hasn t been great, we did see some good falls in January and more recently we saw some useful rain around Easter, even though April can be a tough month. Feed is looking good in some areas but less so in others, although overall conditions are much better than this time last year. Peter Haynes Agribusiness Manager Armidale, New South Wales Economic Report: Rural Commodities Wrap April 215 8

Contact details Agribusiness David Thorn Patrick Vizzone Global Head of Consumer Sectors Regional Head of Food & Agribusiness, Asia Head of Institutional Banking Asia Institutional Banking +852 2822

9 Contact details Agribusiness David Thorn Patrick Vizzone Global Head of Consumer Sectors Regional Head of Food & Agribusiness, Asia Head of Institutional Banking Asia Institutional Banking Economic Research Alan Oster Rob Brooker Phin Ziebell Karla Bulauan Chief Economist Head of Australian Economist - Agribusiness Economist - Economics & Commodities Economics & Commodities Economic Report: Rural Commodities Wrap April 215 9

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